Recession. The Technical versus the Real.

It seems as though every cycle comes with its own new lexicon or isolated points of contention.  During the Great Recession, debate circled around “in what inning of the recession are we?”  For weeks this was bandied about by the “experts” whom had nothing better to do than opine on CNBC or Bloomberg TV. 3rd inning, 7th inning, blah, blah, blah.

Similarly, we heard the same debate about “the Treasury Bubble.”  That one had a shelf-life of over two years until (finally) Bill Gross threw in the towel and went home to “cry in his beer.”  (His words, not mine).  Incidentally, his bottom quintile performance speaks, perhaps, slightly louder than his eventual acknowledgement.

The debate du’ jour happens to revolve around whether the country is re-entering recession.  What is sadly comical about this debate is that is revolves strictly around the technical definition of recession1. A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

I find this debate to be sad due to the fact that, during the exercise of trying to guess whether GDP will fall for two consecutive quarters (and the rafts of graphs, tables, and charts displayed to rationalize one or the other side of the argument); the social damage inflicted by this economy becomes obscured.

At last count, the unemployment rate was 9.1%.  Drive down the street, make a conservative assumption that each home you pass holds only one person actively seeking a job, and understand that (on average), one out of each 11 homes contains an unemployed adult.  Add back the underemployed and those who have simply walked away from the job market and you’ll only have to drive past 7 homes.  That sure feels like a recession.

If you happen to be driving through a minority neighborhood, pass 6 houses and you’ll find someone who is unemployed (source: National Urban League).  Recession?

And while you’re driving by those homes, it could occur to you that 4 out of 10 (on average) are underwater (source: Standard and Poors).  If you’re driving through Las Vegas, 8 of 10 have bubbles rising outside their windows (source: Zillow).  Driving through Orlando, it’s 5 of 10.  That sure feels like a recession.

Let’s keep driving.

With about 46 million Americans now on food stamps, 1 in 7 of the homes we pass will be collecting assistance to eat.  That is 15% of our citizens needing… food.  That sure feels like a recession.

The problem with today’s technical discussion about recession is that it masks the social effects of the present environment.  And from an investment perspective; ignore the social effects at your own risk.

Ignoring the social situation and focusing almost exclusively on monetary policy is short-sighted and ineffective.  If 15% of the country is struggling to eat, 40% of the country has underwater homes, and 9% of the country doesn’t have a paycheck, it strains logic that manufacturing a “wealth effect” by forcing up the price of speculative assets will solve the economy’s woes.  The speculative assets are concentrated with a relative few, and this economy needs broad participation to return to good health.

Further, incessant tinkering with monetary policy has led to bubble after bubble, escalating the social problem each time.

Yet, the debate rages on about recession or no recession, QE3 or no QE3, and risk-on or risk-off.

My thoughts:  If we cannot arrive at a coordinated solution that includes fiscal, monetary, and political sanity, it is hard to consider allocating capital to risk assets.  Sourcing investment returns from areas only loosely associated with risk asset pricing continues to dominate our thinking.

Now…  returning to some observations about the state of our economy, I include some observations from Dr. John Hussman of the Hussman Funds. (

I included the link to Hussman not as an investment recommendation.  Rather, it is a legal condition of reprinting Hussman’s copyrighted material.

“It is now urgent for investors to recognize that the set of economic evidence we observe reflects a unique signature of recessions comprising deterioration in financial and economic measures that is always and only observed during or immediately prior to U.S. recessions. These include a widening of credit spreads on corporate debt versus 6 months prior, the S&P 500 below its level of 6 months prior, the Treasury yield curve flatter than 2.5% (10-year minus 3-month), year-over-year GDP growth below 2%, ISM Purchasing Managers Index below 54, year-over-year growth in total nonfarm payrolls below 1%, as well as important corroborating indicators such as plunging consumer confidence. There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100% sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100% specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions). This doesn’t mean that the U.S. economy cannot possibly avoid a recession, but to expect that outcome relies on the hope that “this time is different.”

As always, it’s up to the reader to determine if these facts are “fitted” to support the conclusion, or the other way around.  In any event, Dr. Hussman is a smart guy and usually has some interesting insights.